New IRS Procedures for Organizations with Unfiled Annual Returns

by Gregory S. Dowell

It is not an excuse, but it is a reality. Many tax-exempt organizations do a great job conducting their core mission. They get the word out about their cause, they rally the troops, and they drum up financial support to help the homeless, give hope to battered women, support the local arts – insert any noble cause you can imagine. More often than you might think, however, while some organizations focus great attention on their mission, they often devote an inadequate amount of time to administering the organization.

From the more routine – bills don’t get paid on time, payroll is not properly established, or bank accounts were not properly established; to the critical – the organization did not apply for its tax-exempt status with the IRS, register with the state government, or file the necessary tax returns – the failure to take care of the business side of the equation can cut the life of the organization short. It is important to grow the organization administratively as well as operationally. Often the key administrative responsibilities are ignored because the organization grew so rapidly – what was once an evening endeavor for an impassioned few people grew a full-blown life of its own; other times, it’s because the leadership and board changes frequently, and every board member brings different skill sets – good and bad – to the table; and sometimes it’s because the admin stuff is just not as appealing.Whatever the reason, this neglect can be fatal to the organization.

One of the more common problems we see is a failure to file annual returns by the organization, at the Federal and State levels. This is no small oversight – organizations can have their tax-exempt status revoked if they fail to file annual tax returns for three consecutive years. Early this year, the IRS introduced new procedures for these organizations to follow to have their exempt status reinstated. Assuming the IRS administers this appropriately, these procedures seem to offer noncompliant organizations a reasonable way to get on the right path again. These procedures are contained in IRS Revenue Procedure 2014-11. Prior to Rev. Proc. 2014-11, the IRS guidance was encompassed in IRS Notice 2011-44, which is now superseded.

As background, tax-exempt organizations that claim exemption under Internal Revenue Code Section 501(a), as well as private foundations under IRC Section 4947(a)(1), must file annual tax returns with the IRS. If the organization’s gross receipts are less than $50,000 annually, an annual notice on form 990-N is filed instead. Failure to file for three consecutive years, as mentioned above, will result in revocation of the tax-exempt status, and the organization must then apply for reinstatement. Often, State filings piggyback off of the Federal filings, in many cases requiring a summary State form with the Federal form attached.

If the organization was eligible to file either form 990-EZ or form 990-N but failed to do so, there is a streamlined retroactive reinstatement process.There are separate retroactive reinstatement procedures for organizations to use, depending on whether that are applying within 15 months of the revocation or later than 15 months. There is also a “post-mark date” process, to be used in cases where the organization is not applying for retroactive reinstatement, and which will be effective from the post-mark date.

If the organization applies under the streamlined procedure, it will need to attest that the failure to file was not intentional and that it has put corrective procedures in place to prevent future mishaps. If the organization is not eligible for the streamlined process but is applying for reinstatement within 15 months of revocation, they will have to provide evidence that supports that there was reasonable cause for the failure to file in at least one of the three years that it failed to file. If the organization is applying for reinstatement after 15 months of revocation, the hurdle is higher: It will need to provide evidence that reasonable cause existed for the non-filings for all three years that it failed to file.

The organization will need to prepare and file the missing annual returns (unless they were eligible to file form 990-N). The IRS will waive failure to file penalties for those years if their application for reinstatement is approved.

The IRS indicates that the new procedures are effective for reinstatement applications filed after January 2, 2014. However, the IRS also indicates that it will apply the new procedures to pending applications, if applying the procedures will be a benefit to the organization.